Centene Finally Wins the Day

Q3 Hits Big For Centene as they weather several storms!

Centene had their earnings last Thursday before the market opened on Friday (10/25) and the market absolutely loved it with a huge top line beat. The stock was up almost 19% on the day but has since fallen to only be up 5% since Friday. Nonetheless, the large beat on revenue caught the market flat footed so naturally investors were excited as they had prepared for some of the negative news we saw in the Elevance earnings with regard to Medicaid acuity. Stuck with their EPS guidance for 2024 at $6.80 but looking to get back to their target of 12%-15% EPS growth in 2025. Overall revenue has risen 10.5% year over year and 7% through the first 9 months of the year to over 122 billion. Really strong quarter for Centene and below are some of the key elements as they continue to be the number one domestic provider of Medicaid and ACA/Marketplace in the US.

Medicaid

Sarah London talked about how transparent they have been with their state partners along with shareholders over the past 18 months when discussing Medicaid redeterminations. Given some of their advanced discussions, they were able to get out in front of the acuity misalignment problem that is causing less reimbursement on a PMPM from what it is actually costing Centene. On the call, they announced they have gotten some price increases from ALL of their state partners. They went on to say they need further discussions with the states to get made whole but at least feel good about where they are headed. On a positive note for growth, they procured Pennsylvania Health and Wellness with long-term support services. In September, they successfully re-procured their statewide presence in Iowa the re-procured Meridian Health Plan in Michigan. Today they sit at about 13 million Medicaid lives which is about a 2.2 million reduction since last September. Sarah London reiterated several times during the Q&A that we are at the high water mark for elevated HBR in Medicaid as they begin to get higher rates while enrollment smooths. She also mentioned that about 30% of the redeterminations ultimately return as they never realized they were redetermined so many of these lag claims have also augmented the HBR elevation. They are trying to approach as many states as possible to have a data driven discussion on what they are seeing in the market on costs and in some cases these meetings are monthly.

Medicare Advantage

The Wellcare line of business has been under pressure for the past two years with some of their STAR ratings really struggling. Sarah London has been focused on improving their STAR ratings and they were able to get a nice improvement when they were released at the beginning of the month. 46% of their members are now in a 3.5 or better plan versus 23% last year which is incredible given some of the difficulty most industry peers are experiencing. They continue to focus on the lower income duals as it is a space that truly understands given their core business is the Medicaid business. Similar to all of the other payors, they exited 6 states and began to invest in regions they believe could be accretive longer term as CMS tightens the reimbursement for seniors. Looking for 14-16 billion in top line from the Medicare Advantage but still less members given the shrink in footprint. They believe the PDP line of business will experience a nice boost to topline revenue as the Inflation Reduction Act will drive more of the risk to the payor instead of the government. I have been skeptical whether they keep this MAPD business (Wellcare) and have been expecting this to be another disposition but they reassured on the call that this is a space they want to be in.